Has Dubai gone bust?

LONDON, U.K. — The party is over in Dubai. It officially ended for the freewheeling emirate late Wednesday afternoon when Dubai World, the government-controlled investment conglomerate, announced a six-month "standstill" on debt repayments.

If Dubai World was hoping that by timing the announcement on the eve of a 10-day religious and national holiday nobody would notice, it miscalculated.

Reaction in financial markets around the world was swift and devastating. Here in London, the FTSE 100 (partially owned by Dubai World) plunged by 3 percent and British banks saw a total of $23 billion in value wiped from their books. There were similar declines in Frankfurt, Paris and Milan.

Wall Street was saved by the Thanksgiving holiday, but the Dow dropped 230 points when the market opened Friday. It recovered but by the time the market closed at 1 p.m. all the major U.S. indexes ended Friday's holiday-shortened session more than 1 percent lower. Asian markets also took a hit on Friday.

The so-called “standstill” declared by Dubai World is bit like telling the bank that you won't be paying the mortgage for the next six months. Your bank would not react sympathetically to such news, but in the case of Dubai World, where the mortgage is $59 billion, the banks have little choice but to sit back, swallow hard and hope somebody comes to Dubai's rescue.

For months, it was assumed that the somebody would be Dubai's wealthier, financially prudent sister emirate, Abu Dhabi. The oil-rich United Arab Emirates is a loose federation of seven emirates, and investors figured that Abu Dhabi would not allow Dubai's potential default to tarnish the U.A.E.'s overall reputation as a safe haven for investment. But thus far, Abu Dhabi has given no signal that it will come to the rescue.

Unlike Abu Dhabi and the other emirates, Dubai has little in the way of oil and gas resources. Its explosive growth over the last decade or so was fueled by high-end real estate speculation and a bid to market itself as a regional transportation hub and home to corporate clients.

Dubai World, which essentially functions as the Dubai government's investment arm, has a diverse portfolio that includes the famous Turnberry golf course in Scotland, Barneys clothing store, the QE2 cruise ship and a 20 percent stake in Cirque du Soleil.

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